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Chinese manufacturing PMI had its lowest reading today since November of 2011, coming in at 49.0 in February vs 49.4 expected, signaling even stronger negative growth pressures on Australia’s export demand. Non-manufacturing PMI came in at 52.7 versus 53.5 expected, also missing analysts’ forecasts and further fueling the negative reaction seen in the AUD/USD.

The data spurred a drop in Australian bond yields of roughly 1.67%, and further perpetuated the markets expectation of at least one rate cut from the RBA over the next 12 months. The priced-in chance of two cuts is highly elevated at 94 percent, with traders leaning toward the May meeting as the likely start of the easing cycle.

AUD/USD fell 0.18 percent to a low of 0.71092, before slowly returning back to the hourly open. The tepid reaction likely reflects traders’ reluctance to commit to a directional bias ahead of the incoming RBA rate decision. Despite the muted response however, the possible impact on the Australian economy is worth noting for the sake of forward monetary guidance.

Since December of 2013, Australian exports to China have dropped from 8538.21 million dollars to 4979.47 million dollars in October of 2015. Today’s data shows a continued decrease in China’s manufacturing strength to levels not seen since 2011. As one of China’s largest trading partners, Australia and its central bank take heavily into account the decreasing demand for Australia’s raw goods and resources, and thus market expectation for a rate cut increases. For these reasons the general direction of economic and fundamental data remains important.

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